by Shane Henson — January 24, 2014—The U.S. national office market absorbed 13 million square feet of space during the fourth quarter (Q4) of 2013—the highest level recorded since 2007, and a 24.5% increase over the highest quarterly net absorption levels over the past six years, according to new research from global professional services and investment management firm Jones Lang LaSalle.
Per the firm’s national office market outlook and accompanying video, in total, approximately 40 million square feet of positive net absorption was recorded for the year—a notable increase over the 28.2 million square feet of occupancy gains across the national office market in 2012.
According to the research, the last three months of 2013 also marked the 15th consecutive quarter with positive net absorption. In addition, of the 44 major downtown and 55 suburban markets, 80% of geographies recorded positive absorption levels between October and December. Further, more than 65% of the national office markets reported higher tenant touring activity heading into 2014—the fourth consecutive quarter of increases.
“These findings show a cohesive, across-the-board tightening in fundamentals, an uptick in overall activity and broadening recovery,” said John Sikaitis, managing director local markets and office research with Jones Lang LaSalle. “After five years of recovery defined by geographic and industry segmentation, increased leasing, touring and absorption helped supply and demand metrics align for the overall national office market in 2013.”
As a result, Jones Lang LaSalle’s report shows vacancy rates during the past 12 months dropped by 40 basis points to 16.6%—the lowest rate in five years. Overall, the central business districts (CBDs) fared better than their suburban counterparts, with a 13.9% vacancy rate at the end of 2013 compared to 18.2% in the suburbs. While still high, the suburban vacancy rate is down a noteworthy 140 basis points from 2012 levels.
As market dynamics shift toward a more stable office environment, landlord confidence continues to grow and, for the 12th consecutive quarter, has fueled increased asking rents and decreased concessions across a broad range of markets. In fact, when looking at leverage for tenants in the market ahead, less than 10% of geographies Jones Lang LaSalle tracks will be tenant-favorable in 2015.
According to Jones Lang LaSalle’s report, 76% of the national office market showed higher rents of an average of 0.4% in the last three months of 2013 alone, and ended out the year some 3.5% higher than where they started.
In regard to the office markets forecast for 2014, looking forward, brighter economic prospects should continue to push leverage in the landlords’ favor until additional supply hits in mid-2015 into 2016, says Jones Lang LaSalle. A combination of diminishing new supply and a dwindling number of large- and mid-sized blocks of space will keep mid-sized tenants as the main drivers of activity.
Further, the spreading of growth across industries and geographies should benefit such diversified economies as Dallas, Chicago, Los Angeles, Philadelphia, Atlanta, and Phoenix. Tech and energy markets may begin to see signs of peaking in the next 12 months until immigration and energy reform efforts in Washington reignite the next phases of growth. Finally, should New York and Washington exhibit continued stability, fundamentals could exceed forecasts over the next couple of years, concludes the firm.
Sikaitis added, “What we will see over the next five to 10 years is that Millennials will replace the Baby Boomer generation as the stewards of the office market. That has a huge impact on where Millennials go, how they want to be, how they want to work, and it’s making some of the market challenged . . . It makes buildings without a sense of place, without amenities, without transit, without a story probably a bit more challenged than what they’ve experienced over the past 20 years.”
